Abuse of Hardship provision???

[Lori H]

Going back to the 2006 plan year a participant has requested a hardship distribution each year and has requested another for the current year (prevent foreclosure). The sponsor is properly documenting the hardship. It seems as if the participant defers for 6 months, takes a hardship, sits out for 6 months and then starts the cycle again. What other steps should the sponsor take?

[ESOP Guy]

Thge first thing that comes to mind is if this person is <59.5 point out the cost of the 10% early withdrawal tax.

The second thing that came to my mind is why does the employer care if this perosn does this? It isn't like a loan refi that creates all kinds of paperwork.

[Lou S.]

I've seen similar patternes with PS money being requested for hardship on an annual basis but defering for 6 months than taking it out as harship seems nutty as ESOP guy implies above, unless there is a generous match that overcomes the negative tax consequeses.

[Lori H]

i see in EPCRS where they mention "abuse of hardship provision" but they don't really address how to prevent it. Of course you have to make a loan first unless that leads to greater hardship.

[masteff]

Is it a questionable pattern? Yes. Is it abusive? IMO, no unless the Service gives us better guidance on what that means.

Abuse to me would be multiple employees who all come in w/ letters from the same dentist requiring prepayment for root canals, or an employee submitting the same paperwork over and over with the date blotted out or questionably altered.

The problem w/ the few solutions that come to my mind is those would punish people with truly legitimate recurring hardships, such as a parent putting a child thru college or a medical patient with ongoing expenses.

[bevfair]

If an HCE takes multiple hardships, from profit sharing, a year for various reasons: medical and education, would you question the abusiveness of the hardship? Obviously we don't know the whole financial situation but taking two hardships within a month's time seems, on the surface, abusive.

[ESOP Guy]

Just to play devils advocate here: What if one month he had to pay a large medical bill because the HCE's spouse just had expensive cancer treatment and the next month the kid went off to college. If the savings had been drained for the medical expenses to the point they needed the hardship it seems reasonable there is no money for the kid's tuition.

In short I think you need more facts to even start to go down that road. I can think of a number of valid reasons for a pattern you described. So to me the answer is "no it doesn't seem like abuse on the surface".

And as noted above the idea of abusive hardships seems undefined.